What's ahead for the stock market

The Fed will meet on interest rates. Several reports will offer a broad picture of housing. General Mills and Nike will top earnings reports.

By Charley Blaine Sep 17, 2010 8:07PM

Charley BlaineGet ready for a fair amount of gloom in the week ahead that could stall the stock market's lovely September rally.

On four straight days, there will be reports about the rocky state of housing, and the Federal Reserve will meet Tuesday on interest rates and will note that the economy is still slowing.

If the stock market survives those four days, the rest of the month may not be too bad. In fact, for all the attention paid to gold (up 2.2% for the month), the Standard & Poor's 500 Index ($INX) is up 7.3%.

All 30 stocks in the Dow Jones Industrial Average ($INDU) are higher, led by General Electric (GE) , Caterpillar (CAT) and JPMorgan Chase (JPM), up 12.5%, 12.3% and 10.2%, respectively.

So are 99 stocks in the Nasdaq-100 Index ($NDX.X), which is up nearly 11%, led by Expedia (EXPD), Oracle (ORCL) and NetApp (NTAP), up 25.8%, 25.1% and 21.5%, respectively. Apple (AAPL), which represents 20% of the index, has risen 13.3%.

Despite that cheer, there are technical reasons to worry about the market. Since Aug. 26, when the Dow closed at 9,986, the blue chips are up 6.2%, with the S&P 500 up 7.5% and the Nasdaq Composite Index ($COMPX) 9.3%. Those are big runs, which make the market vulnerable.

 Article continues below.

Plus, the S&P 500 hit 1,131 on Friday morning, roughly its high in June and August, and promptly fell back. That's profit-taking at work.

But if you're a bull, you note that the Dow, S&P 500 and Nasdaq are trading above the 50-day and 200-day moving averages, both signals of at least some confidence.

Here's what to watch for in the week ahead:

What will the Fed do?
The bond, currency and gold markets are afraid the Fed will start buying gobs and gobs of securities, pushing out more cash to give the economy a boost. The Street name for this is quantitative easing. It's about the one thing the Fed has left to try to get the U.S. economy moving.

The problem is that quantitative easing is viewed as printing money, and the fear is that dollar will collapse. For the record, the dollar is up 4.6% for the year against the British pound and 6.4% against the euro but down 3% against the yen. 

So, traders in those markets will watch the Fed statement on Tuesday to see if it will discuss easing. The statement will come out at 2:15 p.m. ET.

The betting is that the Fed won't ease. It won't move the target on its key federal funds rate either. The economy is just too fragile.

But if the Fed does move on this front, expect gold to jump even faster than it has.

There have been signs that the stock sell-off this summer was overdone and the economy is stronger than thought. That's pushed the 10-year Treasury yield to 2.75% as of Friday from 2.48% on Aug. 31.

Markets for the week



9/17/2010

9/10/2010

% chg.

YTD chg.
Dow industrials

10,607.85

10,462.77

1.4%

1.7%
S&P 500

1,125.59

1,109.55

1.4%

0.9%
Nasdaq 

2,315.61

2,242.48

3.3%

2.0%
Russell 2000

651.44

636.46

2.4%

4.2%
Crude oil 

$73.66

$76.45

-3.6%

-7.2%
(per barrel)











U.S. Dollar Index 

81.64

82.70

-1.3%

4.4%
10-yr. Treasury

2.75%

2.71%

1.5%

-28.5%
Gold

$1,277.50

$1,246.50

2.5%

16.5%
(per troy ounce)












That big housing problem
The four big housing reports will probably be dicey. They include:
  • The Building Sentiment Index from the National Association of Home Builders.
  • Housing starts and building permits for August, due Tuesday from the Commerce Department.
  • Existing-home sales for August, due Wednesday from the National Association of Realtors.
  • New-home sales for August, due Thursday from the Commerce Department.
There will be a lot of hand wringing about these reports because the numbers are so dismal. Existing-home sales are running at about 25% of their peak in 2005. New-home sales are down by roughly 80% from their peak in 2005.

These are numbers that can't be fixed quickly. They depend on a number of elements:
  • Economic confidence and job growth. Those are down right now.
  • Available and affordable financing. Rates are low, but lenders are tough.
  • Appropriate pricing. Prices are lower in most markets.
  • Demand. Are there enough buyers to soak up the supply?
Here's the supply-demand problem in three words. We overbuilt badly.

Between 2000 and 2009, the nation added 13.3 million households -- young people starting out, young families moving up, divorced people seeking to start over, immigrants moving into the country.

The nation's builders added 15.6 million housing units -- single-family homes, condos, apartments. That's a surplus of some  2.3 million dwelling units, 17.3%, over the actual demand.

Add to that simple reality these factors:
  • Many lenders made loans they should never have made.
  • Some buyers were sucked into the housing trap with assurances that home prices wouldn't fall. And they took out loans they couldn't afford.
  • Wall Street was making way too much mortgage money available, especially between 2003 and 2007. 
  • Many laid-off workers and young people are doubling up with family. There were 1.63 million new households formed in 2007. That rate fell to 398,000 in 2009 and is probably at similar levels this year.
The result is the disaster that erupted starting in 2007 with huge supplies of houses, townhouses and apartments sloshing around, especially in markets like California, Nevada, Arizona and Florida.

The Obama administration has tried to fix part of the problem with mortgage modifications. But the process has been too slow, and many borrowers can't afford their new payments.

More important have been homebuyer tax credits that boosted some sales. But the credits have expired, and sales have slumped since.

These problems have arisen before: in the early 1970s, the early '80s and early '90s. But not to the degree of this housing bust.

It will take time to fix the problem. It will be a big reason why economic growth in the next few years will be tepid.

The other economic reports
Also due in the week ahead:

Initial jobless claims, due Thursday from the Labor Department. Claims have fallen modestly for three straight weeks but are still at 450,000 new claims a week. The hope is that the declines will continue.

Durable-goods orders for August, due Friday from the Commerce Department. Nomura Securities sees a gain of 1.5%. Some will be due to airplane orders landed by Boeing (BA), but Nomura thinks the gains will be fairly broad.

Earnings: Carnival, General Mills, Nike
It's a small number of earnings reports, but there are a number to look at.

Homebuilders Lennar (LEN) and KB Home (KBH) report on Monday and Friday. Both are big players in the Sun Belt and have suffered substantially from the housing bust. Watch the orders and, as important, order cancellation rates.

Tuesday: Adobe Systems (ADBE), Carnival Cruise Lines (CCL) and ConAgra Foods (CAG). Adobe will tell us about the willingness of business to buy new software. While consumer survey results don't always match up with actual spending, Carnival will offer a hint of actual consumer activity.

Wednesday: General Mills (GIS) and CarMax (KMX). CarMax specializes in selling used cars. It will add to what Carnival says about consumer attitudes.

Thursday: Nike (NKE). Nike is a big global player in athletic footwear and apparel. It will have a lot to say about consumers. Investors are optimistic. The stock was up 4.8% this week and is up 10.1% in September and nearly 17% on the year.


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